US Interest Rate Markets on Brink of Reset Amid Weakening Economic Data
US interest rate markets have been predicting tighter monetary policy to combat inflation and strong employment numbers. However, recent economic data suggests this may not be justified. The US economy shed 23,000 jobs in July, a much softer outcome than expected. This, combined with previous months' jobs increases being revised downwards, indicates the labour market has cooled over the last 18 months.
Lower oil prices and evidence of declining prices across other sectors also point to a decrease in inflation risks. As a result, interest rate markets are likely to price out expectations of future Fed rate hikes, which would be negative for the US dollar.
The dominant influence on the NZD/USD exchange rate is how the US dollar moves against major global currencies. If the USD Index falls back to its long-term support level at 97.00, it could push the NZD/USD exchange rate higher by 1.50 cents to 0.6050.
The technical charts for the Kiwi dollar look more positive, with a weaker US dollar environment suggesting continued gains. The underlying fundamentals for New Zealand's economy are also improving, driven by higher export volumes and prices.
The Reserve Bank of Australia (RBA) is set to meet this Tuesday to decide whether another OCR interest rate increase is warranted. Stronger employment data supports the case for a hike, but wage increases continue at higher levels, which may counterbalance this.